Some employees will be able to carry over up to $500 in their health flexible spending accounts from one year to next under new rules announced Thursday by the U.S. Department of the Treasury and Internal Revenue Service.

FSAs are voluntary plans that let employees put pre-tax dollars from their paycheck into an account to pay for qualified medical, dental and vision expenses during the year. Anything that goes into the account is exempt from income and payroll taxes.

As they incur expenses, employees get reimbursed from the account. But under the government’s previous rules, any money that was not spent by the end of the year — or by March 15 if their employer has adopted a grace period — was forfeited.

This use-it-or-lose it rule scared off a lot of employees. Only 25 percent of eligible workers participate in health care FSAs, according to WageWorks, a San Mateo company that administers these plans.

Under the new rules, employers that do not offer a grace period can let employees roll over up to $500 of unspent funds from year to year.

The rules are effective immediately, which means employers without the grace period could amend their 2013 plans to let employees carry money into 2014.

Whether they will, this late in the year, remains to be seen.

Many employers have already opened enrollment for their 2014 FSA plans. Those plans also would have to be amended to allow rollovers from 2014 to 2015.

Employees will still forfeit unspent funds unless their employers adopt these changes to permit rollovers.
Joe Jackson, chief executive of WageWorks, predicts that more employers will transition from offering grace periods to rollovers and that “you are going to see a significant increase in enrollment” as a result.

Some employers might be reluctant to offer rollovers because any money that employees forfeit goes to the employer. That helps offset the cost that employers bear when employees leave with a negative balance in their FSA.

Suppose a worker decides to set aside $1,200 over the course of the year. At the end of January, he has a large medical bill. He can seek reimbursement for the full $1,200 even though he has only had $100 withheld from his paycheck. If he left the company mid-year, before having $1,200 withheld from his paycheck, he would not owe the company anything. In this case, the company would “lose it.”

Jackson does not think the potential loss of employee forfeitures will deter them from offering rollovers. “Employers don’t like having those dollars revert to them,” he says.